UK Proposes a New Corporate Governance Code for Large Private Companies

In a previous post, we wrote that the UK Government announced a series of reforms to the UK Corporate Governance regime in August 2017. Some of these reforms are being addressed through the on-going consultation on revisions to the UK Corporate Governance Code (UK CGC) (see our previous post for further details). The UK CGC is the main corporate governance code in the UK and applies (on a “comply or explain” basis) to all UK companies with a premium listing in the UK.

Another of the announced reforms was the development of a corporate governance code for large private companies, backed by new reporting requirements. This was a significant proposal because corporate governance efforts in the UK have historically focussed on publicly listed companies where shareholders are often distant from executives running the company. The Government’s proposal was driven by evidence that private companies constitute a vast (and increasing) portion of the UK economy and its recent experience that their actions (including several recent large-scale failures) can have a significant impact on their employees, suppliers and other stakeholders. This reform is expected to have important implications for a wide variety of large private companies in the UK, including UK subsidiaries of multinational groups and UK portfolio companies of private equity funds.

The Proposed Corporate Governance Principles for Large Private Companies

On 13 June 2018, the Financial Reporting Council (FRC) launched a consultation (available here) on the content and application of this new code. This will be known as “The Wates Corporate Governance Principles for Large Private Companies” (the Wates Principles) and has been developed by a working group led by business figure, James Wates CBE, and including the FRC and various other industry bodies.

The Wates Principles comprise six high-level principles, accompanied by guidance notes. They are based on some of the key principles of the revised UK CGC, but are framed in more general and flexible terms, reflecting the wider spectrum of ownership and governance structures seen among large private companies in the UK. The six principles are:

Purpose – An effective board promotes the purpose of a company, and ensures that its values, strategy and culture align with that purpose.

Composition – Effective board composition requires an effective chair and a balance of skills, backgrounds, experience and knowledge, with individual directors having sufficient capacity to make a valuable contribution. The size of a board should be guided by the scale and complexity of the company.

Responsibilities – A board should have a clear understanding of its accountability and terms of reference. Its policies and procedures should support effective decision-making and independent challenge.

Opportunity and risk – A board should promote the long-term success of the company by identifying opportunities to create and preserve value, and establishing oversight for the identification and mitigation of risks.

Remuneration – A board should promote executive remuneration structures aligned to the sustainable long-term success of a company, taking into account pay and conditions elsewhere in the company.

Stakeholders – A board has a responsibility to oversee meaningful engagement with material stakeholders, including the workforce, and have regard to that discussion when taking decisions. The board has a responsibility to foster good stakeholder relationships based on the company’s purpose.

The Wates Principles will be voluntary but companies that choose to adopt them are expected to follow an “apply and explain” approach, whereby they apply all of the six principles and clearly explain how their governance practices achieve the outcomes embedded in the principles.

The consultation is open until 7 September 2018 and a final version of the Wates Principles is expected to be published in December 2018.

New Corporate Governance Reporting Requirements

The consultation sits alongside new transparency requirements (available here) published by the UK Government earlier this week and expected to be enacted by Parliament shortly. These impose new transparency requirements in a range of areas, including a new CEO-to-employee pay ratio, but we will focus on the new “statement of corporate governance arrangements” in this post.

The new governance reporting requirement will apply to UK-incorporated public and private companies that either: (a) have more than 2,000 employees globally; or (b) both turnover of more than £200 million and total assets of more than £2 billion globally. Premium and standard listed companies that are already required to publish a corporate governance statement under Chapter 7 of the Financial Conduct Authority’s Disclosure Guidance and Transparency Rules will be exempted from the new requirement. However, large UK subsidiaries of UK listed companies (which may already “comply or explain” with the UK CGC) and large UK subsidiaries of foreign listed companies (which may already comply with home country corporate governance rules) will become subject to the new governance reporting requirement.

Any in-scope company will need to publish a statement (in its annual report and on its website) explaining:

which corporate governance code, if any, the company applied;

if the company applied a corporate governance code, how the company applied or departed from that code (together with the reasons for any such departure); and

if the company did not apply a corporate governance code, the reasons for that decision and an explanation of the corporate governance arrangements that it applied.

The new governance reporting requirements are expected to apply to financial years starting on or after 1 January 2019, with reporting therefore expected to commence from 2020 onwards.

To help comply with the new governance reporting requirements, companies can voluntarily adopt the Wates Principles. Alternatively, companies may choose to continue to use industry-developed codes and guidance (e.g., in the case of portfolio companies of private equity funds, those published by the Private Equity Reporting Group and Invest Europe) or some or all of the corporate governance codes or rules that already apply to their parent companies.